How to Win the Credit Card Game

It’s time to get it out in the open. Credit-card companies are in it for the money.

They are in business for the single purpose of making outrageous amounts of money. And they are doing a bang-up job of it.

Think of it like this. As the owner of a credit card you have chosen to participate in a game. This is a one-on-one competition and you’ve agreed to let your opponent write the rules—creating a situation that is heavily weighted in your opponent’s favor. Worse, your competitor isn’t that interested in helping you learn how to play the game. He prefers that you remain ignorant—always paying, never questioning.

Your opponent’s goal is to develop you into a revolver—a little company lingo for one who carries a balance from month to month. Credit-card companies reluctantly tolerate those of us they call deadbeats—cardholders who always pay their balances in full and do not pay interest and fees.

If your win-loss record with your credit card opponent is embarrassingly pathetic, it’s because—and forgive me for saying this—you are ignorant. Isn’t it time to take off the blindfold, get into shape and then even the score?

Strategy: Know the rules. Every credit-card account has a set of rules. You can read some of them on the back of your monthly statement (look for small print, pale ink). Now do something you’ve never done before: Read it. You’ll have to enlarge it on a photocopy machine unless you possess superhuman eyesight.

If you don’t fully understand or find that some information is missing, call customer service. Here’s a list of the features of your credit card that you need to know and understand: 

Annual Percentage Rate (APR)
Monthly interest rate (this one’s easy; divide APR by 12)
Punishment for late payment
Punishment for going over-limit
Grace period guidelines
Fees for cash advances
Balance transfer guidelines
Billing method basis
Single- or two-cycle billing
Statement closing date
Changing the rules

Once you know the rules and the consequences of breaking them, you’ll be less likely to slip up. You’ll find a way to never incur late or over-limit fees and how to pay the very least interest possible. Read your statement very carefully every month. Scrutinize every square millimeter and question anything you do not understand.

Strategy: Stop fantasizing. Your credit-card company doesn’t care about you. They want your money. Their goal is to develop you into a revolver by making sure you owe more than you can repay in a single month. They want you to pay them interest forever.

When they increase your credit limit it’s not because you have achieved something noteworthy. It’s because they want even more of your money. They believe that you respond well to flattery and they know how to pour it on.

Strategy: Don’t Be Late. Just because you mailed it on time doesn’t mean the payment won’t be late.

Take Capital One for example, where sorting the mail is no simple feat. The Virginia-based credit-card issuer sorts and processes anywhere from 100,000 to 600,000 customer payments each day. Three hundred employees and a number of machines make it happen. It’s a far cry from someone with a letter opener. There are any number of things that can happen to delay your check on its journey to being processed the day it is received—if it is received. Remember you are depending on something called the mail to get it to the processing center. Only after a payment is physically posted to an account is it no longer considered “in the mail.”

Strategy: Pay early. If you carry a balance, making your monthly payment early in the billing cycle (even before the stated due date on the billing statement) will save you money. Why? Because most credit-card issuers use the average daily balance method to figure monthly interest or finance charges.

If you make your monthly payment early in the billing cycle, you reduce the daily balance for more days in that cycle. This also reduces the total balance used to figure the average daily balance for that month.

On page 5 are two examples. In the chart on the left the cardholder makes a $400 payment at the end of the billing cycle, just before the due date.

The second example shows the very same beginning balance but the activity is reversed so the payment is made early in the billing cycle. That immediately reduces the average daily balance so more of the payment goes toward the principal. Compare the charts carefully. This is how credit-card companies figure how much interest a revolver pays.

Notes: Previous balance $2500, Annual Interest Rate 18 percent, Monthly Interest Rate 1.5 percent.

There are two reasons you should get into the habit of paying credit-card bills as soon as they arrive. First, you will avoid incurring horrendous penalties for being late if there are mail delays, and you’ll pay less interest.

Strategy: Don’t fall from grace. Many issuers are whittling away at the amount of time you have between making a purchase and interest beginning to accrue. If you do not carry a balance from month to month and depend on those interest-free days (revolvers lose their grace period as long as they carry a balance from one month to the next), a change from a 25- to a 20-day grace period can be very significant. Some companies are doing away with grace periods altogether. That means that even if you pay in full the clock starts ticking the minute you make a purchase.

Strategy: Death to cash advances. Interest rates on cash advances can be very steep (19 to 27 percent, sometimes more) plus there’s a cash advance fee. Adding to the interest are the horrible fees; some issuers are effectively charging more than 30 percent for cash advances. That is ludicrous.

What’s worse, most issuers now reserve the right to allocate a customer’s payment toward balances with lower APRs first. That means if you take a cash advance it will continue accruing big interest until you get the lower APR balances paid in full. Don’t even think about cash advances on a credit card.

Strategy: Watch the mail. Credit-card companies reserve the right to not only write the rules, but to change them whenever they like. Always read your statement each month as this is where you will likely be notified of a change.

Another reason to watch the mail: Your account could be sold to another company. You will be notified but you might think it’s junk mail. If you don’t like being sold like a piece of meat, make a call to the new customer service. You won’t be able to change owners, but try to negotiate the terms.

Strategy: Know where you are. The worst thing you can do with a credit card is lose track of what you’ve spent and how much you owe.

If you use a card (may I say that unless you pay it in full every month, it would be better if you didn’t), get into the habit of recording every transaction the same way you record checks that you write. You’ve spent the money so write your credit purchases in your checkbook as if you wrote a check for that amount. Include the exact amount of the purchase and deduct it from your bank balance.

Circle your credit purchases in red so that when your statement arrives you can check the circled amounts against the credit-card statement. If everything is correct write a check for that amount (make the proper adjustment in your check register so you don’t deduct again the credit charges you’ve already taken into account) and send it in early.

There’s something important about writing down credit-card transactions as they occur. It’s called reality.

Strategy: Become a deadbeat. If you are a revolver, develop a plan to repay the balance in full so you can lose that designation. If the card requires an annual fee, get rid of it. There are still lots of no-fee cards. See Low Interest Credit Cards at www.IndexCreditCards.com or Cardtrak’s No Fee Card Survey, www.cardtrak.com.

Make a personal commitment to never again pay credit-card interest. Become a deadbeat! If you use it, pay the balance in full long before the grace period ends.

Never pay interest, a late or over-limit fee. Always know where you are with your credit-card balance. Set up online access and check your balance every day. You’ll stay in reality.

That’s the way to win the credit-card game every time. 

"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "Debt-Proof Living" is read by close to 100,000 cheapskates.    Click here to subscribe.